Cheating With Partial Options Hedges

By Bill Luby:
[The following first appeared in the May 2011 edition of Expiring Monthly: The Option Traders Journal. I thought I would share it because of the strong positive feedback I received as well as the large number of questions I have recently fielded about hedges.]
After more than two years of a surging bull market that has seen the major stock market indices more than double, it is not surprising that many investors are becoming more concerned about protecting existing profits than finding ways to increase existing account balances. As someone who makes a living trading options, you would think that finding a way to hedge my portfolio using options ought to be second nature by now. In fact, I have always placed more emphasis on offense than defense, not because I underestimate the importance of risk management, but because I generally find the opportunity cost of portfolio protection to beComplete Story »

Related

No, it is not zero, not even if government borrowing rates were literally at zero. Yet I’ve seen that claim a few dozen times in the last year or two, so let’s walk through some arguments that were fully standard by the 1970s.
Opportunity cost is ultimately defined in real resource terms, converted into value. So if the government borrows more money and mobilizes robots to do some work, that means fewer robots to do work elsewhere.

Many readers have inquired about how much of their portfolio should actually be hedged to reach 100% portfolio protection. This is not an easy question to answer as each portfolio is unique. The particular portfolio may include stocks, bonds, ETFs, mutual funds, options, REITs and MLPs. Some of these investments (such as defensive stocks) are inherently partial hedges and need not be fully considered in hedging a portfolio.

MUMBAI: Traders may soon get to trade in bank index options contracts that expire every week. The National Stock Exchange (NSE) is planning to launch weekly Bank Nifty options contracts soon that will give market participants the flexibility to hedge their portfolio or trade at a lower premium. Currently, the exchange's Bank Nifty futures and options contracts have a monthly expiry. As Bank Nifty is more volatile compared to Nifty, weekly options contracts will allow traders to trade intraday as well as with time horizon of two to three days.